When you start thinking about investing, you'll quickly notice there are lots of options out there. Two choices that often catch the eye of long-term investors are LICs (Listed Investment Companies) and mutual funds. They both offer ways to invest your money, but they work a bit differently.
Treat this article as your guidebook. It's here to help you understand LICs and mutual funds and how they apply to your investing journey. By the end, you'll know how they're different and hopefully figure out which one fits into your investment strategy.
Whether you're saving up for something big or just want to see your money grow as a safety net, getting to know these investment types is a smart move. Let's dive in and make sense of LICs and mutual funds together .
What are LICs?
LICs, or Listed Investment Companies, are a type of diversified investing fund. Operating like a managed fund , an LIC is an investment basket that includes different asset classes such as stocks and bonds. When you invest in an LIC, you're not just getting a piece of one company. Your investment portfolio gets exposure to different companies that the LIC manager chooses.
The key part? This basket is managed by professionals who decide what to buy or sell with the aim of making the basket more valuable over time.
Now, why are they called "listed"? Because you can find and buy these investments on an exchange like the Australian Stock Exchange (ASX). This means you can buy or sell your shares whenever you want, like you would with any other stock.
What are mutual funds?
A mutual fund is a big bucket in which many people put their money to invest. Like an LIC, mutual funds invest in a variety of investments, such as stocks or bonds. Unlike other investments, mutual funds don’t have their prices changing throughout the market trading day. Instead, at the end of each day, a new price is set based on the underlying investments held in the fund.
As with LICs, mutual funds allow you to own a bit of many different investments while you sit back and allow someone else to manage them. A fund manager chooses each investment in the mutual fund, seeking to grow the money in the bucket.
What are the differences between LICs and mutual funds?
Both LICs and mutual funds let you invest your money into a mix of asset classes in a single investment, while aiming to grow your cash over time. However, there are some differences to take note of that can affect your investment.
It’s important to understand these differences to make informed decisions aligned to your goals. Here’s a handy comparison to help you out:
Feature |
LIC (Listed Investment Company) |
Mutual Fund |
---|---|---|
How it's traded |
LICs are traded like stock on the exchange. Their prices change throughout the day. |
Mutual funds are not traded on an exchange. You buy and sell directly with the fund, and the price is set at the end of the day. |
Investment or asset management |
An LIC is usually actively managed, but can be passively managed too. Managers choose investments aiming to beat the market or assigned benchmark. |
A mutual fund can be actively or passively managed. Active funds try to beat the market, while passive ones aim to match a market index. |
Pricing |
Prices can be above or below the actual value of the assets (premium or discount) because it's based on supply and demand. |
Price is based on the fund's net asset value (NAV) at the end of the trading day, reflecting the value of all investments. |
Dividends |
May retain earnings and pay dividends at the manager's discretion. |
Typically pays out almost all income and gains to investors. |
Investor control |
Investors have no say in the management or the choice of investments. |
Investors usually don't influence the fund's management or investment choices. |
In simple terms, with an LIC, you buy a piece of a company that invests in different assets and trades like a stock. Mutual funds are like joining a pool where money from various investors is managed together, and each investor gets a share of the overall pot.
Both LICs and mutual funds allow you to invest in diverse asset classes, which is great for spreading out risk (which is called diversifying).
LICs vs mutual funds for long-term investing
When you’re thinking about long-term investing, LICs and mutual funds are both valid options for investing your money. Knowing their key features and how they work can help you decide what’s best for your long-term goals. Let’s take a look:
Consideration |
LIC (Listed Investment Company) |
Mutual Fund |
---|---|---|
Fees
|
LICs might generally have lower fees in comparison, but it’s important to check because fees can vary between investments. |
Mutual funds often charge a percentage fee of how much you’ve invested. Note that this can eat into your returns over time, especially if the fund doesn’t perform well. |
Volatility
|
Prices can fluctuate more throughout the day since they're traded like stocks. So, their prices can jump around more based on what people are willing to pay for them at any given time. |
Mutual funds are generally more stable due to broader diversification. Even so, this is still subject to market changes. |
Diversification This means spreading your risk across different investments to give your portfolio more stability. |
An LIC offers exposure to a variety of assets, but check the mix as this can vary from one LIC to another. |
A mutual fund typically offers a wide range of assets for diversification, which is managed by the fund. |
Liquidity
|
With LICs, you sell your shares on the stock market , so how quickly you can sell at your preferred price depends on market conditions. |
Mutual funds are generally easy to cash out at the end of each day based on the fund's net asset value. |
Active/Passive Management
|
Can be active or passive, but many are actively managed. The approach and style can vary based on the fund maanager. |
Can also be active or passive, with many funds actively managed, but passive options are available too. |
In the long run, both LICs and mutual funds can be used to help you reach your financial goals. But there's also a whole menu of investment choices and market instruments out there for long-term investors like you. A crowd favourite among the Pearler community is ETFs (Exchange-Traded Funds) . ETFs are preferred by long-term investors for their diversification, flexibility, low costs, and ease of buying and selling.
Though ETFs are popular among the Pearler community, this doesn’t mean they’re the only way to go or the right choice for all investors. How do you know what’s right for you? We'll talk about that next.
Should I invest in LICs or mutual funds?
Deciding whether to put your money into a Listed Investment Company or a mutual fund is up to you and what you feel most comfortable with.
Both options have their pros and cons, and what works for one investor might not be appropriate for someone else. There’s no right or wrong, but here’s what you might want to think about:
- Personal goals: What are you saving for? Different investments can suit different goals.
- Investing style: Are you someone who prefers a more passive strategy, or do you like the idea of professionals making those decisions for you?
- Amount to invest : Check if there’s a minimum investment amount that fits what you’re able to invest.
- Investing horizon: How long do you plan to keep your money invested?
- Risk profile: How do you feel about the value of your investment going up and down?
Remember, you don’t have to stick to just one investment. You can mix and match (diversify), choosing a bit of both LICs and mutual funds or even neither. Of course, this choice depends on the considerations noted above.
And it’s okay to change your mind as you learn more and your goals evolve.
Making your choice: LICs or mutual funds
As we've explored the world of LICs and mutual funds, it's clear that both have their unique features. Whether you're looking at LICs or mutual funds, the idea is to help you grow your money over time, aiming for that sweet spot of Financial Independence.
The world of investing is big, and there are plenty of paths to explore for your financial future. The most important thing is to stay informed and stay engaged. Remember that it’s fine to take your time to figure out what works best for you. In this journey, the most important thing is to start somewhere and keep learning along the way.
Happy investing!